February 08, 2010Goodbye, Cruel Sun

The history of Sun's high ride and demise, and the continuing story of the newly-merged Oracle's fortunes, will occupy the minds of the IT industry and its pundits for a long time to come. I could easily go on and on about it, but that's not what I want to talk about here. Instead, I think that something should be pointed out about the way it all ended. It's another example of a phenomenon that's been covered extensively in political circles, and present in the public mind ever since the Wall Street collapse -- grotesquely extravagant compensation and golden parachutes for executives whose performance, on objective terms, can only be viewed as failure, compared to the burdens borne by laid-off rank-and-file employees who were far less responsible for the company's woes. What does this tell us about the Reaganist dogma of an unencumbered free market that currently has a powerful grip on the minds of almost everyone in the US ruling class? The circumstances of my own departure from Sun, under the laws and standards of a "socialist" European state, have something to say about that.

To head off a possible reservation that you may be having -- one could reasonably suppose that this is just sour grapes from a disgruntled ex-employee, directing his resentment at his former bosses. On the contrary, I had a pretty good job at Sun for the most part, and have done fairly well for myself in leaving, as we'll see in a moment. The title of this post is just a play on words; I don't think that Sun was cruel. And I've always had a rather sympathetic view of Sun's executives, inasmuch as you can have a valid opinion about personalities who are highly visible and seem familiar but are in fact very remote (like Hollywood celebrities). I agreed with many of the things they tried to do, and disagreed with some others, as did just about everyone else in the company. What Sun did well, but not well enough to survive independently, are complex questions that will elicit a wide variety of sometimes contradictory answers. But I think it's fair to say that, for all the miscues that eventually led to its demise, the company created many products and technologies of value along the way, enough so that Oracle thought it was worth it to acquire them and try to keep them going.

However, I think that it's equally fair to conclude that, after years of running losses, including about $2 billion in fiscal 2009, so that a buyout was necessary to avoid looming bankruptcy, Sun's executives did nothing to deserve lavish rewards, by any conceivable meaning of the word "deserve". But what actually happened is by now a familiar story. As a regulatory requirement for the merger, Sun filed a statement with the SEC in October detailing the compensation (salary, stock awards, options and various perks) that executives were expected to receive as a result of the acquisition deal. As interpreted by the Register, the figures mean that Sun's final CEO Jonathan Schwartz ("Jonathan" in the lingo of us ex-Sunnies) stood to gain $19.8 million in stock value. Ex-CEO, co-founder and chairman Scott McNealy ("Scottie") gained $164.5 million; in all, Sun's top 21 executives owned stock and options amounting to a three percent share in the company, meaning that they stood to gain $217.5 million from the deal.

That's just from the increase in stock value, which came about because of the price that Oracle paid for the takeover ($9.50 per share, 42% higher than Sun's closing price on the day that the acquisition was announced). The SEC filing also sets forth the golden parachutes that executives would receive if they are let go after the merger: $12.8 million for Jonathan, $10 million for Scottie, and about $4 million to $5 million to various other executive vice presidents.

I had the clever timing to join Sun in 2001, just as the Internet bubble was unraveling. The boom was a wonderful time for Sun, but the company never really recovered from the bust -- there were signs of a rebound in the year or two before 2008, but when the financial crash hit, Sun was essentially done in for good (Jonathan's tweet announcing his departure from Oracle/Sun included this haiku: "Financial crisis/Stalled too many customers/CEO no more"). Within my first few years at the company, Scottie announced the first "reduction in force", or RIF, the euphemism for layoffs that quickly got verbed ("did you hear? Joe Blow's getting riffed!"). Over the years, I couldn't keep track of how many rounds of RIFs went by; probably an average of one for every year I was there, affecting many thousands of employees, including about 7500 during the past year or so. Most of the time, the layoffs were associated with a "restructuring" that put me into a different internal organization, each of them named with a different acronym that makes my work history at Sun look like alphabet soup, and each time assigning me to a different manager. I had, on average, a new boss every year. More layoffs are expected as a result of the Oracle acquisition, as inevitably happens with such large-scale mergers. Oracle CEO Larry Ellison said that there would actually be a net increase in the workforce for the Sun business, with an additional 2000 hires; but 1000 former Sun employees would be let go (and none of the reports about this mentioned the fact that Oracle quietly advised Sun to complete its 7500-strong RIF before the merger).

In his farewell message to Sun's employees, Jonathan had this to say to those who "ultimately won't become a part of Oracle":

With the world economy stabilizing, I'm very confident you'll land on your feet. You're a talented, tenacious group, and there's always opportunity for great people.

I'll be the first to admit that many laid-off IT workers probably aren't in quite as bad a predicament as some of the other unemployed, relatively speaking. Most of my former colleagues who lost their jobs are skilled, well-educated specialists working in an industry with a strong demand for their abilities; I have no personal knowledge of anyone from Sun who crashed and burned altogether after getting riffed. Then again, I don't personally know everyone who lost their job, and certainly can't guarantee that no crash-and-burn stories ever happened. These were people who were trying to support their middle-class families, pay for their homes, and ensure a good future for their kids, and all of these goals are at risk after a layoff. I can attest that for every one of them, no matter how highly skilled, the RIF was a frightening and demoralizing experience, forcing them into an uncertain future. Moreover, many of the affected employees come from the back office, the department that tends to be hit hardest by layoffs; the 1000 Sunnies to be let go by Oracle are rumored to come mostly from there. These are workers with clerical skills that cannot necessarily count on new openings in a tight job market just because they were associated with the IT industry. Worst of all, Jonathan's sanguine confidence about a "stabilizing world economy" is startlingly naive in view of an economy that is currently at about 10% unemployment in the US (16.5% on the more comprehensive U6 measure), expected by optimistic projections to remain above 7% for the next three years, with similarly high unemployment on average in the EU, as much as 12% in Ireland and 19% in Spain. In the current atmosphere, no one is assured of a new job, no matter what their background is. Jonathan's message was no doubt meant to be optimistic and encouraging, but an assertion this complacent, coming from someone who is walking away with about $30 million and addressed to employees whose economic survival is at grave risk, is presumptuous to say the least.

... this is not a note this founder wants to write. Sun, in my mind, should have been the great and surviving consolidator. But I love the market economy and capitalism more than I love my company.

And I sure "hope" America regains its love affair with capitalism. And except for the auto industry, financial industry, health care, and some other places (I digress), the invisible hand is doing its thing quite efficiently. So I am more than willing to accept this outcome.

And my hat is off to one of the greatest capitalists I have ever met, Larry Ellison. ...

One can only wonder why he put the word "hope" in scare quotes, and what he meant by America "regaining its love affair with capitalism". Scottie is known to be a Republican; he maxed out on campaign donations to John McCain in 2008, and to David Dreier in 2007. In view of the recent Daily Kos/Research 2000 poll showing that 63% of Republicans believe that Barack Obama is a "socialist" (and other examples of astounding disconnect from reality), I'm inclined to suspect that the scare-quoted "hope" is an allusion to Obama, and the remark reflects a genuine belief that America has turned away from, or fallen out of love with, "capitalism". If so, then I have to wonder if he thinks of it as "capitalist" or "socialist" that he's getting about $175 million for having founded and led a company that lost billions, laid off tens of thousands, and ceased to exist.

In the introduction I referred to what I call the "Reaganist dogma" of the free market, my description of what a Republican might refer to as "capitalism" as opposed to "socialism". This is the conviction that market forces, and only those forces, can be counted on to deliver economic rewards to those who "deserve" them, and the more they deserve, the more they get. The market also penalizes those who are not capable or hard-working enough to "deserve" more. If corporate executives receive tens or hundreds of millions in salary, bonuses, stock value and golden parachutes, well then they simply deserve that much -- they are the Masters of the Universe, the Best and the Brightest, the wizards of business whose brilliance is necessary to run a successful company, and they're being compensated at a level commensurate with their skill. Those who take home less, or lose their jobs, must not have been competent or industrious enough to do better. And only the market can make these determinations; any interference with those forces, such as labor regulations, union negotiations or progressive taxes, only serves to distort the market's equitable distribution of wealth to those who deserve to be more wealthy.

Historically minded readers might fairly object to my use of the word "Reaganist" to name this ideology, pointing out that Ronald Reagan did not originate those ideas ("Friedmanist" or "Randian" might be a better attribution to the intellectual authors), nor did he actually govern all that dogmatically according to them, at least not as much as many people now believe. I choose that name because, accurately or not, Reagan is the figure who today is upheld as the grandfather of the ideology, a mythologized and unassailable American icon, which is part of the reason why the dogma itself is regarded by many as a sacred American value beyond dispute. That's certainly the case for conservatives these days; for them it's an article of faith, a certainty that never needs to be scrutinized against evidence, a "love affair", a central component of their identity. Those who would dispute it in any form are not only wrong, but guilty of a moral sin; they're "socialists", a word that is indistinguishable in their minds from "communist" and "traitor". It's also implicitly assumed as conventional wisdom by most American media, and deeply internalized by nearly all of the Democratic leadership, as evidenced most famously when Obama spoke with approval of Reagan having "changed the trajectory of America".

These assumptions have made it profoundly difficult in the United States to implement a wide variety of measures that are desperately needed, ranging from financial reform to an adequate stimulus to comprehensive health care reform to
measures against climate catastrophe. And all of this in spite of the fact that the dogma is empirically refuted in numerous ways -- even taken on its own terms, it fails to account for the states of affairs that prevail in the real world. Whatever sympathies we may have for a company and its leadership, whatever we think the company "should have been", the only thing that matters on the Reaganist worldview is the bottom line, and the bottom line for Sun is that it went out of business. Scottie acknowledged as much when he wrote that "I love the market economy and capitalism more than I love my company", but he left something out of the love story. The survival of a company is the responsibilty of its executives, and the bottom line for Sun's executives is that they failed. One would think that the reward for failure, certainly from the standpoint of someone who claims to love the market economy and capitalism, would be nothing at all. And yet, as we have seen so often in recent times, it's the failures who make off with a king's ransom, while the brunt of a company's woes are borne by the laid-off rank-and-file employees, who had the least influence on its fortunes and the least means to fend for themselves in a strained economy. If this is what "capitalism" means, no wonder Scottie loves it; who wouldn't love 175 million bucks?

For all of the millions and billions going around, Sun's story is frankly small potatoes compared to the calamity and glorious executive benefits that prevail in the financial industry. The demise of an IT player is influential enough, but its effects are largely limited to just one industry, whereas the meltdown of Wall Street's irresponsible crap shoot took down the entire global economy. Far from the Best and the Brightest, the case could be made that the financial world's leaders are the Worst and the Dimmest. And yet according to recent reports, Goldman Sachs CEO Lloyd Blankfein, whose company received $1.1 billion in TARP funds, may be getting a bonus of about $100 million. AIG, who was rescued to the tune of $180 billion in 2008, is paying out bonuses totalling $100 million for employess of its financial products division -- the unit at the heart of the derivatives scam that brought about the collapse.

Why do things like this happen? The leadership of a public company like Sun or Oracle, the kind that anyone can own a share in by buying public stock, is bound by what is known as the "fiduciary duty" -- their decisions must be made with the goal of maximizing company profit, to be paid out to its owners in the form of dividends to the shareholders. Shareholders supervise the executives' fulfillment of this duty through a board of directors, who are elected by the shareholders and usually represent the interests with the largest shares. Notice that the well-being of employees, or of the public at large in the economy in which a company participates, are not a part of this equation. The idea of the market economy is that everyone benefits, at least indirectly, when companies act according to the incentives defined by the fiduciary duty. A company seeking to maximize profit will be inclined to give better compensation to employees who create more value, and to work efficiently to deliver products and services with value that matches the price that customers are willing to pay, thus benefitting the economy at large. But in recent decades, it's been increasingly the case that the shareholders whose profits executives seek to maximize are, to a large extent, themselves. Direct payments in the form of salary and bonuses are now often the smallest part of executive compensation; the largest part of the package is made of stock and options awards. Sun's second-largest shareholder was Scott McNealy; Jonathan Schwartz and CFO Michael Lehmann were among the top six. Scottie was the chairman of Sun's board of directors throughout nearly all of the company's lifetime. If executives who are also major shareholders work out an acquisition deal in which the buyer pays a price per share that is 42% higher than its current market price, then they've certainly done their job of maximizing shareholder profits, and at the same time have scored a juicy windfall for themselves.

Adherents of the Reaganist dogma in the US, and others who profess their "love" for a "capitalist" system that distributes so much wealth in such a dubious way, are often the same people who like to sneer at the "socialism" in Western Europe -- in spite of the consistently high standards that European nations obtain in health care, education, and various other measures of public well-being. I think that the circumstances of my own departure as an employee of Sun in Germany is yet another small real-world example that demonstrates how foolhardy it is to dogmatically reject the regulation of business, specifically with respect to labor laws. Middle-class workers like myself are better off overall if we have a little bit of power to negotiate with management, the kind of power that only a government and its laws can provide.

For the final round of RIFs last year, the big one, Sun Germany made an offer to "volunteers" -- employees who agree to leave the company under beneficial terms. It included severance pay that, according to a lawyer I consulted who specializes in employment cases, was generous on German standards: the amount was based on years of service with the company and scaled to increase with the age of employees over 40; a "turbo-bonus" for volunteers equivalent to three months' salary; and additional benefits for each of the employee's dependents. Volunteers would stop working for Sun as of the new year, but could remain on payroll for up to four months, after which they could enroll in outsourcing or outplacement services with subsidies from Sun.

The decision about whether or not to volunteer had to be made quickly, a risky proposition because it would hardly be possible to have a new job secured before the deadline passed. My manager informed me that I wasn't on the RIF list, but I decided to go for it. For me, the deal worked out to about a year's salary -- with the four-month free period and the total severance package, I would be able to support my family for the entire year 2010, which I reckoned would be enough time to find a new job, and I'd come out ahead if I found one sooner. As it turned out, I found a new job right away; so now I'm taking advantage of the free time availed by the waiting period (formally I'm still an employee of Sun Germany), and when the time has elapsed and the severance pay arrives, I'll be able to pay off all of my outstanding debts, so that in the end I'll not only be debt-free, but in the black such as I've never been before.

Sun Germany made a good offer to volunteers, and the reasons for that have a lot to do with German labor laws and standards. A major difference between the economies of the US and Germany is that unions in Germany are now much more powerful than their counterparts in the US, where their influence has declined enormously in recent decades. White-collar industries are generally not unionized, but employees at many companies in all branches of the economy are represented by a works council (Betriebsrat), which consist of employees elected by the rank-and-file and are legally empowered to negotiate with management on their behalf. In particular, the conditions of a layoff generally cannot be dictated unilaterally by management; they have to be negotiated with the council. Legal disputes between a company and its council or individual employess are settled, if necessary, by dedicated labor courts (Arbeitsgericht).

I wasn't privy to the negotiations between Sun and its council -- most of what I understand was explained at water-cooler conversations -- and I'm not sure what I could disclose if I were, so let's put this in hypothetical terms. Suppose that the management of a Germany company decides that it wants to lay off N employees, where the number N could be described as "considerable". Suppose also that this is a fully-owned subsidiary of a multinational American corporation, and the number N has been handed down by the American parent company. The German management may be under orders to execute the layoff, but in Germany they can't just do that; layoffs due to poor economic conditions have to be justified by extent of losses incurred by the German company, not by a number that the courts would regard as arbitrary. An employee could dispute the layoff in labor court, where judges customarily make comparisons to other companies in the same industry, examining how many people are typically laid off in response how high the losses are. The number N, relative to the financial losses experienced by the German company in question, would have been far too out of proportion; the laid-off employees would have very good chances to prevail in court. If the German company goes ahead with the simple plan to get rid of N employees, they'd have about N labor court cases on their hands, with poor chances to win any of them.

So far that sounds pretty good from the employees' perspective; most importantly, it's what gives a works council significant negotiating leverage with management. The problem is that a labor court challenge in Germany rarely results in an employee saving the job -- usually, a successful challenge means that the employee gets a better settlement, meaning more money from the employer, but will have to find a new job anyway. In light of that, it's in the interest of both the management and the works council of our hypothetical German company to work out a deal by which laid-off employees get a good severance package and other tools to weather the unemployment. Under those conditions, the layoff is much more likely to prevail in labor court, so that management can get the reductions it wants, and the council has at least mitigated the harm to the departing employees.

This arrangement does not address the issue of extravagant executive compensation -- about as controversial in German politics as it is in the US -- but it goes a long way towards softening the impact of unemployment. And it all results from laws and courts placing restraints on how and why a company can fire people. I don't know why anyone might dismiss that as "socialism", but knowning the present state of discourse in the US, I don't doubt that many people would, outraged at the idea that the government or anyone else can have anything to say about who gets fired. But if so, that attitude is just dogma. It is far more important to find ways to lessen the real-world human impact of economic crisis than to slavishly follow the imperatives of an ideology, or a love affair, that in so many ways fails to deliver on its promises of a better world for all of us.

So what will happen to the newly-expanded Oracle? Only time will tell, and predictions in the IT industry are notoriously risky, but the new software-hardware giant is widely regarded as a formidable force to be reckoned with. I wish them all the success in the world -- as an ex-Sunnie, I can't help but relish the idea of seeing them give IBM a good run. Whatever happens, however, one thing seems to be certain -- the excesses of executive compensation appear to be no better at Oracle than anywhere else.

Larry Ellison, praised by Scottie as "one of the greatest capitalists I have ever met", was estimated in 2005 as having a net worth of $18.4 billion, making him the ninth-richest man in the world (in 2000 he was the richest man in the world for a while). He received a total compensation of over $85 million in 2008, and $56.8 million in fiscal 2009, and is known to have a taste for fast yachts and exotic cars, among other luxuries. Oracle has been a successful company for many years, doing relatively well during the current hard times, so presumably somebody thinks that the money for Ellison is well-spent; after all, it was Oracle that bought Sun, not the other way around. But after all that's happened, it ought to be clear by now that the Master of the Universe concept is baloney. And here's a prediction that I feel quite certain of: if, against expectations and my hopes, Ellison drops the ball and things start going south for Oracle, it's the employees who will suffer for it, and he'll be doing just fine.

Great blog, agree with everything you say. Capitalism as we practice in America is just a shelter for the rich, while the middle class is suffering and shrinking; see my blog at:http://mr20.blogspot.com/20...

Wow, the system in Germany sounds miserable. If I need to layoff some of my employees, I'm supposed to throw myself on the mercy of the court system? Or what - go out of business?

Granted, it's pissy that Schwartz was the 12th highest compensated CEO in 2006 or 2007 while the company itself was taking (WTF?!) but nobody has a "right" to their job and a company certainly has a right - even if it's selfish - to cut employees. I say this as someone who was one of the many RIFs at Sun (far more than one a year since 2000 - there have been more like 1.5 or 2 per year as far as I recall).

@no: It certainly isn't miserable for the people hit by the layoffs, and that's who the system should be working for. Layoffs generally affect large numbers -- tens of thousands at Sun -- who are then in the weakest position in a poor economy. Unemployment depresses consumer demand, lengthening a recession, lowering tax revenues and thus increasing deficits. It's in everyone's interest that they get some protection.

And as I understand it, German companies usually can get the reductions they want. To recapitulate two things, there is generally no problem with court challenges if the number of headcounts reduced is not out of proportion with the losses sustained, compared to what's common in the same industry. And a successful court challenge usually doesn't save the job, the employee just gets more money.

Seems to me that it's the least you can ask for, when executives who lost the company are walking away with tens and hundreds of millions.

A couple of questions here for you. I live in Israel, which has a hybrid socialist/capitalist system that gets wrong on many counts.

The unionized employees which work for the government or monopolies and are so strong that they can demand clearly illegal things like a pay increase (although they earn on average 4 times the median salary) or else they threaten to shut down electricity, ports, etc.
an added "bonus" of this system is that it's common to see entire families working for some union-controlled company.

The non unionized employees sometimes don't even get the minimum wage mandated by law and enforcement of labor laws is weak, partly due to the fact that major unions have a political influence that renders labor laws irrelevant for them.

another issue is this: many employees of multinational corporations such as Intel, HP, IBM and others OBJECT unionization on the grounds that is makes them less competitive in the global market and that it's better to be un-unionized than unemployed.

another consideration is that labor laws may discourage a company considering investment in Israel from doing so, fearing they may not be able to let people go if need be. and again, it's better to be un-unionized than unemployed.

current labor laws in Israel grant every employee a month of pay for every year he/she worked for a company and up to 6 months of reasonable unemployment wage.

So yeah, unions and laws can be great but also very, very dangerous if misused.

@Yakov, thanks for your perspective. Many similar kinds of objections have been leveled at the system in Germany -- that labor is too expensive, with all of the benefits that an employer has to support, and that companies are restrained about hiring people because it's hard to get rid of them once they've got the job. Some strikes can be highly inconvenient to many people; I've never heard of electricity being shut down (and doubt that it's legal), but public transportation can be disrupted (although not nearly as often as it seems to happen in places like Italy). And IT companies are generally not unionized; ten years ago, many of them didn't seem to have works councils either, but most of them seem to now (mostly in response to layoffs after the Internet bust).

In Germany, it's customary for severance packages to be computed as a month's wage for each year of service (I don't think that's the law, however), and I think that unemployment benefits are extended for at least 6 months as well. I think that's a good thing.

There are some differences. I've never heard of a big problem with people not getting the minimum in Germany, certainly not due to weak enforcement or non-union membership. There is some incidence of "black market" employment, people working off the rolls, making little, not paying taxes and so forth, but businesses that do that are at risk of raids.

And I can see why a union's demands for pay increases might be excessive, but why do you say they're "clearly illegal"?

Obviously, the balance of power can go too far either way, and it's tough in a global economy to pay for a system with a lot of benefits to workers when employers can take the jobs to another country where labor is cheap -- and workers have terrible conditions. But countries like that are mostly not very prosperous either. Also, many of these objections are raised by employers and they're self-serving -- of course they'd like to hire workers more cheaply and fire them more easily, if they can.

Workers need to have some power on their side. Softening the impact of unemployment has benefits for everyone, as I argued in the comment above. Other advantages for the general population, like a good health care system and good education, are good for everyone. Germany's having problems getting through the present economy like everybody else, but on a worldwide scale, they're doing very well.

What I mean by "clearly illegal" is when the ministry of finance audits past wages and pension plans in the electric company (being state-owned), it discovers rampant over-paying to tens of thousands of unionized workers. Than, the ministry attempts to cooperate with said company to devise a plan to return these funds back to the country's budget. The response is a strike threat, although money was taken without authorization.

What more, rampant employment of family and friends of union members and free electricity for all employees. Those benefits are at the expense of the electric bill and the state budget. So, all these cost overruns come out from the citizens pockets, directly via the bill or indirectly in taxes.

A few years ago, a combination of summer heat, peak power usage and delayed maintenance due to a strike caused widespread interruption in electricity which resulted in a few fatalities.

The problem with unpaid minimum stems from the fact that those unpaid are unskilled workers such as security guards, various cleaners, etc. They're employed via third party "Human Resources" companies.

Now, they are afraid to unionize out of fear for their job. Being poor, they can't risk loosing the job. Since they're usually not young, (40+), hard working, they aren't politically active and are under represented.

Basically, no one gives a damn about them. Even the government sometimes buys services from such companies at such a price that the company can't pay a minimum wage and be profitable at the same time.

There's been some improvement for them, since High Court established clearer rules but exploitation is still happens.

Naturally, the biggest, strongest unions are the ones best represented with senior parliament members offering them various "favors" in exchange for their vote when the time comes.

When it comes to health and education, i tend to agree with you. Isn't is absurd that the US, one of the worlds wealthiest countries, having a much higher per capita health spending consistently undershoots the European average? Yet, they keep arguing over "Death panels"...

It isn't free market capitalism if the government sets the price of capital (interest rates). It is unfortunate that so many people mistake corporate cronyism and fascism for free market capitalism. It drives them towards socialism which is ultimately no better.

bbypy - February 10, 2010-18:21

Well done Geoff,
I left 2 and a half years ago (we had the same mangeer) to regain my nightly sleep .. but without any compensation or turbo bonus :-(
Mike